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Great Depression

GREAT DEPRESSION

GREAT DEPRESSION, the longest, deepest, and most pervasive depression in American history, lasted from 1929 to 1939. Its effects were felt in virtually all corners of the world, and it is one of the great economic calamities in history.

In previous depressions, such as those of the 1870s and 1890s, real per capita gross domestic product (GDP)the sum of all goods and services produced, weighted by market prices and adjusted for inflationhad returned to its original level within five years. In the Great Depression, real per capita GDP was still below its 1929 level a decade later.

Economic activity began to decline in the summer of 1929, and by 1933 real GDP fell more than 25 percent, erasing all of the economic growth of the previous quarter century. Industrial production was especially hard hit, falling some 50 percent. By comparison, industrial production had fallen 7 percent in the 1870s and 13 percent in the 1890s.

From the depths of depression in 1933, the economy recovered until 1937. This expansion was followed by a brief but severe recession, and then another period of economic growth. It was not until the 1940s that previous levels of output were surpassed. This led some to wonder how long the depression would have continued without the advent of World War II.

In the absence of government statistics, scholars have had to estimate unemployment rates for the 1930s. The sharp drop in GDP and the anecdotal evidence of millions of people standing in soup lines or wandering the land as hoboes suggest that these rates were unusually high. It is widely accepted that the unemployment rate peaked above 25 percent in 1933 and remained above 14 percent into the 1940s. Yet these figures may underestimate the true hardship of the times: those who became too discouraged to seek work would not have been counted as unemployed. Likewise, those who moved from the cities to the countryside in order to feed their families would not have been counted. Even those who had jobs tended to see their hours of work fall: the average work week, 47 to 49 hours in the 1920s, fell to 41.7 hours in 1934 and stayed between 42 and 45 until 1942.

The banking system witnessed a number of "panics" during which depositors rushed to take their money out of banks rumored to be in trouble. Many banks failed under this pressure, while others were forced to merge: the number of banks in the United States fell 35 percent between 1929 and 1933.

While the Great Depression affected some sectors of the economy more than others, and thus some regions of the country more than others, all sectors and regions experienced a serious decline in output and a sharp rise in unemployment. The hardship of unemployment, though concentrated in the working class, affected millions in the middle class as well. Farmers suffered too, as the average price of their output fell by half (whereas the aggregate price level fell by only a third).

The Great Depression followed almost a decade of spectacular economic growth. Between 1921 and 1929, output per worker grew about 5.9 percent per year, roughly double the average in the twentieth century. Unemployment and inflation were both very low throughout this period as well. One troublesome characteristic of the 1920s, however, was that income distribution became significantly less equal. Also, a boom in housing construction, associated in part with an automobile-induced rush to the suburbs, collapsed in the late 1920s. And automakers themselves worried throughout the late 1920s that they had saturated their market fighting for market share; auto sales began to slide in the spring of 1929.

Technological advances in production processes (notably electrification, the assembly line, and continuous processing of homogenous goods such as chemicals) were largely responsible for the advances in productivity in the 1920s. These advances induced the vast bulk of firms to invest in new plants and equipment In the early 1920s, there were also innovative new products, such as radio, but the decade after 1925 was the worst in the twentieth century for new product innovation.

Causes of the Great Depression

In 1929 the standard economic theory suggested that a calamity such as the Great Depression could not happen: the economy possessed equilibrating mechanisms that would quickly move it toward full employment. For example, high levels of unemployment should put downward pressure on wages, thereby encouraging firms to increase employment. Before the Great Depression, most economists urged governments to concentrate on maintaining a balanced budget. Since tax receipts inevitably fell during a downturn, governments often increased tax rates and reduced spending. By taking money out of the economy, such policies tended to accelerate the downturn, though the effect was likely small.

As the depression continued, many economists advised the federal government to increase spending, in order to provide employment. Economists also searched for theoretical justifications for such policies. Some thought


the depression was caused by overproduction: consumers did not wish to consume all that was produced. These analysts often attributed overproduction to the increased disparity in income that developed in the 1920s, for the poor spend a greater percentage of their income than do the rich. Others worried about a drop in the number of profitable investment opportunities. Often, these arguments were couched in apocalyptic terms: the Great Depression was thought to be the final crisis of capitalism, a crisis that required major institutional restructuring. Others, notably Joseph Schumpeter, pointed the finger at technology and suggested that the Great Depression reflected the failure of entrepreneurs to bring forth new products. He felt the depression was only temporary and a recovery would eventually occur.

The stock market crash of 1929 and the bank panics of the early 1930s were dramatic events. Many commentators emphasized the effect these had in decreasing the spending power of those who lost money. Some went further and blamed the Federal Reserve System for allowing the money supply, and thus average prices, to decline.

John Maynard Keynes in 1936 put forward a theory arguing that the amount individuals desired to save might exceed the amount they wanted to invest. In such an event, they would necessarily consume less than was produced (since, if we ignore foreign trade, total income must be either consumed or saved, while total output is the sum of consumption goods and investment goods). Keynes was skeptical of the strength of equilibrating mechanisms and shocked many economists who clung to a faith in the ability of the market system to govern itself. Yet within a decade the profession had largely embraced his approach, in large part because it allowed them to analyze deficient consumption and investment demand without reference to a crisis of capitalism. Moreover, Keynes argued that, because a portion of income was used for taxes and output included government services, governments might be able to correct a situation of deficient demand by spending more than they tax.

In the early postwar period, Keynesian theory dominated economic thinking. Economists advised governments to spend more than they taxed during recessions and tax more than spend during expansions. Although governments were not always diligent in following this prescription, the limited severity of early postwar business cycles was seen as a vindication of Keynesian theory. Yet little attention was paid to the question of how well it could explain the Great Depression.

In 1963, Milton Friedman and Anna Schwartz proposed a different view of the depression. They argued that, contrary to Keynesian theory, the deflationary actions of the Federal Reserve were primarily at fault. In the ensuing decades, Keynesians and "monetarists" argued for the supremacy of their favored theory. The result was a recognition that both explanations had limitations. Keynesians struggled to comprehend why either consumption or investment demand would have fallen so precipitously as to trigger the depression (though saturation in the housing and automobile markets, among others, may have been important). Monetarists struggled to explain how smallish decreases in the money supply could trigger such a massive downturn, especially since the price level fell as fast as the supply of money, and thus real (inflation-adjusted) aggregate demand need not have fallen.

In the 1980s and 1990s, some economists argued that the actions of the Federal Reserve had caused banks to decrease their willingness to loan money, leading to a severe decrease in consumption and, especially, investment. Others argued that the Federal Reserve and central banks in other countries were constrained by the gold standard, under which the value of a particular currency is fixed to the price of gold.

Some economists today speak of a consensus that holds the Federal Reserve, the gold standard, or both, largely responsible for the Great Depression. Others suggest that a combination of several theoretical approaches is needed to understand this calamity.

Most economists have analyzed the depression from a macroeconomic perspective. This perspective, spawned by the depression and by Keynes's theories, focuses on the interaction of aggregate economic variables, including consumption, investment, and the money supply. Only fairly recently have some macroeconomists begun to consider how other factors, such as technological innovation, would influence the level of economic activity.

Beginning initially in the 1930s, however, some students of the Great Depression have examined the unusually high level of process innovation in the 1920s and the lack of product innovation in the decade after 1925. The introduction of new production processes requires investment but may well cause firms to let some of their workforce go; by reducing prices, new processes may also reduce the amount consumers spend. The introduction of new products almost always requires investment and more employees; they also often increase the propensity of individuals to consume. The time path of technological innovation may thus explain much of the observed movements in consumption, investment, and employment during the interwar period. There may also be important interactions with the monetary variables discussed above: in particular, firms are especially dependent on bank finance in the early stages of developing a new product.

Effects of the Great Depression

The psychological, cultural, and political repercussions of the Great Depression were felt around the world, but it had a significantly different impact in different countries. In particular, it is widely agreed that the rise of the Nazi Party in Germany was associated with the economic turmoil of the 1930s. No similar threat emerged in the United States. While President Franklin Roosevelt did introduce a variety of new programs, he was initially elected on a traditional platform that pledged to balance the budget. Why did the depression cause less political change in the United States than elsewhere? A much longer experience with democracy may have been important. In addition, a faith in the "American dream," whereby anyone who worked hard could succeed, was apparently retained and limited the agitation for political change.

Effects on individuals. Much of the unemployment experience of the depression can be accounted for by workers who moved in and out of periods of employment and unemployment that lasted for weeks or months. These individuals suffered financially, to be sure, but they were generally able to save, borrow, or beg enough to avoid the severest hardships. Their intermittent periods of employment helped to stave off a psychological sense of failure. Yet there were also numerous workers who were unemployed for years at a time. Among this group were those with the least skills or the poorest attitudes. Others found that having been unemployed for a long period of time made them less attractive to employers. Long-term unemployment appears to have been concentrated among people in their late teens and early twenties and those older than fifty-five. For many that came of age during the depression, World War II would provide their first experience of full-time employment.

With unemployment rates exceeding 25 percent, it was obvious that most of the unemployed were not responsible for their plight. Yet the ideal that success came to those who worked hard remained in place, and thus those who were unemployed generally felt a severe sense of failure. The incidence of mental health problems rose, as did problems of family violence. For both psychological and economic reasons, decisions to marry and to have children were delayed. Although the United States provided more relief to the unemployed than many other countries (including Canada), coverage was still spotty. In particular, recent immigrants to the United States were often denied relief. Severe malnutrition afflicted many, and the palpable fear of it, many more.

Effects by gender and race. Federal, state, and local governments, as well as many private firms, introduced explicit policies in the 1930s to favor men over women for jobs. Married women were often the first to be laid off. At a time of widespread unemployment, it was felt that jobs should be allocated only to male "breadwinners." Nevertheless, unemployment rates among women were lower than for men during the 1930s, in large part because the labor market was highly segmented by gender, and the service sector jobs in which women predominated were less affected by the depression. The female labor force participation ratethe proportion of women seeking or possessing paid workhad been rising for decades; the 1930s saw only a slight increase; thus, the depression acted to slow this societal change (which would greatly accelerate during World War II, and then again in the postwar period).


Many surveys found unemployment rates among blacks to be 30 to 50 percent higher than among whites. Discrimination was undoubtedly one factor: examples abound of black workers being laid off to make room for white workers. Yet another important factor was the preponderance of black workers in industries (such as automobiles) that experienced the greatest reductions in employment. And the migration of blacks to northern industrial centers during the 1920s may have left them especially prone to seniority-based layoffs.

Cultural effects. One might expect the Great Depression to have induced great skepticism about the economic system and the cultural attitudes favoring hard work and consumption associated with it. As noted, the ideal of hard work was reinforced during the depression, and those who lived through it would place great value in work after the war. Those who experienced the depression were disposed to thrift, but they were also driven to value their consumption opportunities. Recall that through the 1930s it was commonly thought that one cause of the depression was that people did not wish to consume enough: an obvious response was to value consumption more.

The New Deal. The nonmilitary spending of the federal government accounted for 1.5 percent of GDP in 1929


but 7.5 percent in 1939. Not only did the government take on new responsibilities, providing temporary relief and temporary public works employment, but it established an ongoing federal presence in social security (both pensions and unemployment insurance), welfare, financial regulation and deposit insurance, and a host of other areas. The size of the federal government would grow even more in the postwar period. Whether the size of government today is larger than it would have been without the depression is an open question. Some scholars argue for a "ratchet effect," whereby government expenditures increase during crises, but do not return to the original level thereafter. Others argue that the increase in government brought on by the depression would have eventually happened anyhow.

In the case of unemployment insurance, at least, the United States might today have a more extensive system if not for the depression. Both Congress and the Supreme Court were more oriented toward states' rights in the 1930s than in the early postwar period. The social security system thus gave substantial influence to states. Some have argued that this has encouraged a "race to the bottom," whereby states try to attract employers with lower unemployment insurance levies. The United States spends only a fraction of what countries such as Canada spend per capita on unemployment insurance.

Some economists have suggested that public works programs exacerbated the unemployment experience of the depression. They argue that many of those on relief would have otherwise worked elsewhere. However, there were more workers seeking employment than there were job openings; thus, even if those on relief did find work elsewhere, they would likely be taking the jobs of other people.

The introduction of securities regulation in the 1930s has arguably done much to improve the efficiency, fairness, and thus stability of American stock markets. Enhanced bank supervision, and especially the introduction of deposit insurance from 1934, ended the scourge of bank panics: most depositors no longer had an incentive to rush to their bank at the first rumor of trouble. But deposit insurance was not an unmixed blessing; in the wake of the failure of hundreds of small savings and loan institutions decades later, many noted that deposit insurance allowed banks to engage in overly risky activities without being penalized by depositors. The Roosevelt administration also attempted to stem the decline in wages and prices by establishing "industry codes," whereby firms and unions in an industry agreed to maintain set prices and wages. Firms seized the opportunity to collude and agreed in many cases to restrict output in order to inflate prices; this particular element of the New Deal likely served to slow the recovery. Similar attempts to enhance agricultural prices were more successful, at least in the goal of raising farm incomes (but thus increased the cost of food to others).

International Effects

It was long argued that the Great Depression began in the United States and spread to the rest of the world. Many countries, including Canada and Germany, experienced similar levels of economic hardship. In the case of Europe, it was recognized that World War I and the treaties ending it (which required large reparation payments from those countries that started and lost the war) had created weaknesses in the European economy, especially in its financial system. Thus, despite the fact that trade and capital flows were much smaller than today, the American downturn could trigger downturns throughout Europe. As economists have come to emphasize the role the international gold standard played in, at least, exacerbating the depression, the argument that the depression started in the United States has become less central.

With respect to the rest of the world, there can be little doubt that the downturn in economic activity in North America and Europe had a serious impact. Many Third World countries were heavily dependent on exports and suffered economic contractions as these markets dried up. At the same time, they were hit by a decrease in foreign investment flows, especially from the United States, which was a reflection of the monetary contraction in the United States. Many Third World countries, especially in Latin America, responded by introducing high tariffs and striving to become self-sufficient. This may have helped them recover from the depression, but probably served to seriously slow economic growth in the postwar period.

Developed countries also introduced high tariffs during the 1930s. In the United States, the major one was the Smoot-Hawley Tariff of 1930, which arguably encouraged other countries to retaliate with tariffs of their own. Governments hoped that the money previously spent on imports would be spent locally and enhance employment. In return, however, countries lost access to foreign markets, and therefore employment in export-oriented sectors. The likely effect of the increase in tariffs was to decrease incomes around the world by reducing the efficiency of the global economy; the effect the tariffs had on employment is less clear.

BIBLIOGRAPHY

Barnard, Rita. The Great Depression and the Culture of Abundance: Kenneth Fearing, Nathanael West, and Mass Culture in the 1930s. New York: Cambridge University Press, 1995. Explores the impact of the depression on cultural attitudes and literature.

Bernanke, Ben S. Essays on the Great Depression. Princeton, N.J.: Princeton University Press, 2000. Emphasizes bank panics and the gold standard.

Bernstein, Michael A. The Great Depression: Delayed Recovery and Economic Change in America, 19291939. New York: Cambridge University Press, 1987. Argues for the interaction of technological and monetary forces and explores the experience of several industries.

Bordo, Michael D., Claudia Goldin, and Eugene N. White, eds. The Defining Moment: The Great Depression and the American Economy in the Twentieth Century. Chicago: University of Chicago Press, 1998. Evaluates the impact of a range of New Deal policies and international agreements.

Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 18671960. Princeton, N.J.: Princeton University Press, 1963.

Hall, Thomas E., and J. David Ferguson. The Great Depression: An International Disaster of Perverse Economic Policies. Ann Arbor: University of Michigan Press, 1998.

Keynes, John M. The General Theory Of Employment, Interest, and Money. New York: St. Martin's Press, 1964. Original edition published in 1936.

Margo, Robert A. "Employment and Unemployment in the 1930s." Journal of Economic Perspectives 7, no. 2 (spring 1993): 4159.

Rosenbloom, Joshua, and William Sundstrom. "The Sources of Regional Variation in the Severity of the Great Depression: Evidence from U.S. Manufacturing 19191937." Journal of Economic History 59 (1999): 714747.

Rosenof, Theodore. Economics in the Long Run: New Deal Theorists and Their Legacies, 19331993. Chapel Hill: University of North Carolina Press, 1997. Looks at how Keynes, Schumpeter, and others influenced later economic analysis.

Rothermund, Dietmar. The Global Impact of the Great Depression, 19291939. London: Routledge, 1996. Extensive treatment of the Third World.

Schumpeter, Joseph A. Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. New York: McGraw-Hill, 1939.

Szostak, Rick. Technological Innovation and the Great Depression. Boulder, Colo.: Westview Press, 1995. Explores the causes and effects of the unusual course that technological innovation took between the wars.

Temin, Peter. Did Monetary Forces Cause the Great Depression? New York: Norton, 1976. Classic early defense of Keynesian explanation.

. Lessons from the Great Depression. Cambridge, Mass.: MIT Press, 1989. Emphasizes the role of the gold standard.

Rick Szostak

See also Agricultural Price Supports ; Banking: Bank Failures, Banking Crisis of 1933 ; Business Cycles ; Keynesianism ; New Deal ; and vol. 9: Advice to the Unemployed in the Great Depression, June 11, 1932 .

Personal Effects of the Depression

The study of the human cost of unemployment reveals that a new class of poor and dependents is rapidly rising among the ranks of young sturdy ambitious laborers, artisans, mechanics, and professionals, who until recently maintained a relatively high standard of living and were the stable self-respecting citizens and taxpayers of the state. Unemployment and loss of income have ravaged numerous homes. It has broken the spirit of their members, undermined their health, robbed them of self-respect, and destroyed their efficiency and employability. Many households have been dissolved, little children parcelled out to friends, relatives, or charitable homes; husbands and wives, parents and children separated, temporarily or permanently.Men young and old have taken to the road. Day after day the country over they stand in the breadlines for food. The law must step in and brand as criminals those who have neither desire nor inclination to violate accepted standards of society. Physical privation un dermines body and heart. Idleness destroys not only purchasing power, lowering the standards of living, but also destroys efficiency and finally breaks the spirit.

SOURCE: From the 1932 Report of the California Unemployment Commission.

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Great Depression

Great Depression

THE GREAT DEPRESSION IN THE UNITED STATES

THE DEPRESSION WIDENS

THEORIES

BIBLIOGRAPHY

Between 1929 and 1933 the world economy collapsed. In country after country, although not in all, prices fell, output shrank, and unemployment soared. In the United States the rate of unemployment reached 25 percent of the labor force, in the United Kingdom 16 percent, and in Germany a staggering 30 percent. These rates are only roughly comparable across countries and with twenty-first century unemployment rates because of different definitions of unemployment and methods of collection; nevertheless, they show the extremity of the crisis. The recovery, moreover, was slow and in some countries incomplete. In 1938 the rate of unemployment was still at double-digit levels in the United States and the United Kingdom, although thanks to rearmament it was considerably lower in Germany. A number of previous depressions were extremely painful, but none was as deep or lasted as long. There were many recessions that came after, but none could begin to compare in terms of prolonged industrial stagnation and high unemployment. The consequences stemming from the Great Depression for economies and polities throughout the world were profound. The early appearance of depression in the United States and the crucial role of the United States in world trade make it important to consider the U.S. case in some detail.

THE GREAT DEPRESSION IN THE UNITED STATES

There had been severe depression in the United States before the 1930s. The most similar occurred in the 1890s. Indeed, the sequence of events in the 1890s foreshadowed what was to happen in the 1930s in some detail. Prices of stocks began to decline in January 1893, and a crash came in May and June after the failure of several well-regarded firms. The market continued to decline, and at its low point in 1896 had lost 30 percent of its value. The decline in the stock market was associated with a sharp contraction in economic activity. A banking panic intensified the contraction. There seem to have been two sources for the panic. First, fears that the United States would leave the gold standard prompted by the growing strength of the free silver movement led to withdrawals of gold from New York. In addition, a wave of bank failures in the South and West produced by low agricultural prices also undermined confidence in the banking system. Runs on banks spread throughout the country and the crisis ended with a general restriction of the conversion of bank notes and deposits into gold. The money supply fell, the economy slowed, bank and business failures multiplied, and unemployment rose. Although a recovery began in June 1894, the recovery was slow and uneven. By 1897 one-third of the railroad mileage in the United States was in receivership. It took until 1898 for the stock market to match its 1893 peak, and for annual real gross domestic product (GDP) per capita to match its 1892 level.

During the early 1930s events unfolded in a similar fashion. There were few signs in 1929, however, that a Great Depression was on the horizon. There had been a severe contraction in 19201921, but the economy had recovered quickly. There were minor contractions in 19231924 and 19261927, and the agricultural sector had struggled during the 1920s, but overall the economy prospered after the 19201921 recession. In 1929 unemployment in the United States was just 3.2 percent of the labor force; in many ways it was a vintage year.

The stock market boomed in the late 1920s and reached a peak in 1929; prices rose nearly 2.5 times between 1927 and its peak in 1929. Economic historians have long debated whether there was a bubble in the market in the late 1920s, meaning that prices of shares had risen more rapidly than fundamentals. Research conducted in 1993 by Peter Rappoport and Eugene White and other late-twentieth-century views have strengthened the case for a bubble. They have shown that many well-informed investors doubted the long-run viability of prevailing prices. There were undoubtedly, however, many other investors who believed that the economy had entered a so-called New Age, as was said at the time, in which scientific and technical research would produce rising real incomes, rising profits, and an eventual end to poverty.

The crash of the stock market in the fall of 1929 was partly a reflection of the state of the economya recession was already under waybut the crash also intensified the slowdown by undermining confidence in the economic future. The major impact of the crash, as shown by Christina Romer in her 1990 work, was to slow the sale of consumer durables. The crash may also have influenced markets around the world by forcing investors to reassess their optimistic view of the future. In any case, the stock markets in most other industrial countries after having risen in the 1920s also fell to very low levels in the first half of the 1930s. The U.S. market lost two-thirds of its value by 1933, the German market (which had peaked before the American market) lost one half, and the British market, which did somewhat better, lost one-fifth.

The collapse of the American banking system then intensified the contraction. There were repeated waves of bank failures between 1930 and 1933 produced by the economic contraction, by the decline in prices, especially in the agricultural sector, and perhaps by a contagion of fear. As people withdrew their cash from banks to protect their wealth, and as banks increased their reserves to prepare for runs, the stock of money shrank. The collapse of the American banking system reflected a number of unique circumstances. First, laws that prevented banks based in one state from establishing branches in other states, and sometimes from establishing additional branches within a state, had created a system characterized by thousands of small independent banks. In contrast, most other countries had systems dominated by a few large banks with branches. In Canada where the system consisted of a small number of banks with head offices in Toronto or Montreal and branches throughout the country there were no bank failures. In addition, the young and inexperienced Federal Reserve System (it was established in 1913) proved incapable of taking the bold actions needed to end the crisis.

Many explanations have been put forward for the failure of the Federal Reserve to stem the tide of bank runs and closures. Milton Friedman and Anna J. Schwartz in their classic Monetary History of the United States (1963) stressed an internal political conflict between the Federal Reserve Board in Washington and the New York Federal Reserve Bank that paralyzed the system. A 2003 study by Allan Meltzer stresses adherence to economic doctrines that led the Federal Reserve to misinterpret the fall in nominal interest rates during the contraction. The Treasury bill rate fell from about 5 percent in May 1929 to. 10 percent in September 1933. The Federal Reserve viewed low rates as proof that it had made liquidity abundant and that there was little more it could do to combat the depression. The bank failures, which were concentrated among smaller banks in rural areas, or in some cases larger banks that had engaged in questionable activities, the Federal Reserve regarded as a benign process that would result in a stronger banking system. From 1930 to 1933 about 9,000 banks in the United States suspended operation and the money supply fell by one-third.

During the interregnum between the election of President Franklin Roosevelt in November 1932 and his taking office in March 1933 the banking system underwent further turmoil. In state after state governors proclaimed bank holidays that prohibited or limited withdrawals from banks and brought the banking and economic system to a standstill. The purpose of the holidays was to protect the banks from panicky withdrawals, but the result was to disrupt commerce and increase fears that the system was collapsing. By the time Roosevelt took office virtually all of the banks in the United States were closed and perhaps one-quarter of the labor force was unemployed. Roosevelt addressed the situation boldly. Part of his response was to rally the spirits of the nation. In his famous first inaugural address he told the people that the only thing we have to fear is fear itself. His address also promised work for the unemployed and reforms of the banking system. The administration soon followed through. Public works programs, which focused on conservation in national parks and building infrastructure, were created to hire the unemployed. In the peak year of 1936 approximately 7 percent of the labor force was working in emergency relief programs.

The banking crisis was addressed in several ways. Banks were inspected and only sound banks were allowed to reopen. The process of inspection and phased reopening was largely cosmetic, but it appears to have calmed fears about the safety of the system. Deposit insurance was also instituted. In 1963 Milton Friedman and Ann Jacobson Schwartz argued that deposit insurance was important in ending the banking crisis and preventing a new eruption of bank failures by removing the fears that produced bank runs. Once depositors were insured by a federal agency they had no reason to withdraw their funds in cash when there was a rumor that the bank was in trouble. The number of bank failures in the United States dropped drastically after the introduction of deposit insurance.

The recovery that began in 1933, although not without setbacks, was vigorous and prolonged. By the middle of 1937 industrial production was close to the 1929 average. Still, there was considerable concern about the pace of recovery and the level of the economy. After all, with normal economic growth the levels of industrial production and real output would have been above their 1929 levels in 1937. Unemployment, moreover, remained stubbornly high. With a few more years of continued growth the economy might well have recovered fully. However, another recession, the recession within the depression, hit the economy in 1937. By the trough in 1938 industrial production had fallen almost 60 percent and unemployment had risen once more. Mistakes in both fiscal and monetary policy contributed to the severity of the contraction, although the amounts contributed are disputed. The new Social Security system financed by a tax on wages was instituted in 1935, and the taxes were now put in place. The Federal Reserve, moreover, chose at this time to double the required reserve ratios of the banks. The main purpose of the increase was to prevent the reserves from being a factor in the future, to tie them down. The banks, however, were now accustomed to having a large margin of reserves above the required level and they appear to have cut their lending in order to rebuild this margin. The economic expansion that began in the summer of 1938, however, would last throughout the war and pull the economy completely out of the depression. Indeed, even before the United States entered the war as an active participant at the end of 1941, fiscal and monetary stimuli had done much to cure the depression.

THE DEPRESSION WIDENS

Most market-oriented countries, especially those that adhered to the gold standard, were affected by the Great Depression. One reason was the downward spiral of world trade. The economic decline in the United States hit hard at firms throughout the world that produced for the American market. As the depression spread from country to country, imports declined further.

The gold standard, to which most industrial countries adhered, provided another channel for the transmission of the Great Depression. The reputation of the gold standard had reached unchallenged heights during the period of expanding world trade before World War I. Most countries, with the exception of the United States, had abandoned the gold standard during the war to be free to print money to finance wartime expenditures. After the war, the gold standard had been reconstructed, but in a way that left it fragile. Most countries decided not to deflate their price levels back to prewar levels. Hence the nominal value of world trade relative to the amount of gold in reserve was much higher after the war than before. Under the gold standard orthodoxy of the day central banks were supposed to place maintenance of the gold standard above other priorities. If a country was losing gold because its exports had fallen faster than its imports, the central bank was supposed to raise interest rates to protect its gold reserve, even if this policy exacerbated the economic contraction. Countries that gained gold might have lowered their rates, but they were reluctant to do so because lower rates would put their gold reserves at risk.

The global transmission of information and opinion provided a third, hard to measure, but potentially important channel. The severe slide on the U.S. stock market and other stock markets focused attention throughout the rest of the world on factors that might produce a decline in local markets. Waves of bank failures in the United States and central Europe forced depositors throughout the rest of the world to raise questions about the safety of their own funds. Panic, in other words, did not respect international borders.

Although these transmission channels assured that the whole world was affected in some degree by the depression, the experience varied markedly from country to country, as even a few examples will illustrate. In Britain output fell from 1929 to 1932, but the fall was less than 6 percent. The recovery, moreover, seems to have started sooner in Britain than in the United States and the growth of output from 1932 to 1937 was extremely rapid. Unemployment, however, soared in 1929 to 1931 and remained stubbornly high for the remainder of the decade. Although Britain was becoming less dependent on exports, exports were still about 15 percent of national product. The fall in exports produced by the economic decline in the United States and other countries, therefore, probably explains a good deal of the decline in economic activity in Britain. In September 1931 Britain devalued the pound and left the gold standard. The recovery in Britain began soon after. Export growth produced by a cheaper pound does not seem to have played a prominent part in the recovery, but a more expansionary monetary policy permitted by leaving gold does seem to have played a role. On the whole it may be said that the British economy displayed surprising resiliency in the face of the loss of its export markets.

Germany, on the other hand, suffered one of the most catastrophic declines. A severe banking crisis hit Germany in July 1931, punctuated by the failure of the Darmstädter-und Nationalbank on July 13. The German crisis may have been provoked by the failure of the Credit Anstalt bank in Austria in May 1931 and the subsequent run on the Austrian shilling, although economists have debated these factors. Germany soon closed its banks in an effort to stem the runs, and abandoned the gold standard. Germany, however, did not use the monetary freedom won by abandoning the commitment to gold to introduce expansionary policies. Between June 1930 and June 1933 the stock of money in Germany fell by nearly 40 percent. Prices and industrial production fell, and unemployment soared. Under the Nazis government spending, much of it for rearmament, and monetary expansion produced an extended economic boom that restored industrial production and full employment.

The experience of Japan where the depression was unusually mild has stimulated considerable interest. Unemployment rose mildly by Western standards between 1929 and 1933 and fell to 3.8 percent by 1938. Other indicators, such as the stock market, also rose between 1933 and 1938. Many observers have attributed this performance to the actions of Finance Minister Korekiyo Takahashi. In 1931 Takahashi introduced a stimulus package that included a major devaluation of the yen, interest rate cuts, and increases in government spending. The latter element of his package has led some observers to refer to Takahashi as a Keynesian before Keynes. Late twentieth-century research has challenged the notion that Takahashi was able to break completely free of the economic orthodoxies of the day, but the strong performance of the Japanese economy remains an important signpost for scholars attempting to understand the factors that determined the course of events in the 1930s.

THEORIES

The factors previously stressed, the collapse of the banking system in the early 1930s, and the policy mistakes by the Federal Reserve and other central banks are of most relevance to what has come to be called the monetarist interpretation of the Great Depression. Some economists writing in the 1930s, such as Jacob Viner and Laughlin Currie, developed this view, concluding that much of the trouble could have been avoided if the Federal Reserve and other central banks had acted wisely.

In the aftermath of the publication of John Maynard Keynes General Theory (1936), however, an alternative interpretation held sway. The Keynesians argued that the breakdown of the banking system, although disturbing, was mainly a consequence of the collapse of aggregate demand. The behavior of the Federal Reserve was at most a secondary problem. The Keynesians blamed the fall in aggregate demand on the failure of one or more categories of autonomous spending. At first, attention focused on investment; later attention shifted to consumption. The answer to the Great Depression was public works financed, if necessary, by borrowing. The New Deal in the United States had spent a great deal of money and run up highly controversial deficits; 1956 calculations by E. Cary Brown, however, showed that a number of factors, including cuts in spending at the state and local level, had offset the effects of New Deal spending. Fiscal policy had failed to return the economy to full employment, according to Brown, not because it did not work, but because it was not tried (1956, pp. 863866).

Friedman and Schwartzs Monetary History, which provided an extraordinarily detailed account of the effects of monetary policies during the 1930s and put the Great Depression into the broader context of American monetary history, returned the collapse of the banking system to center stage. Their interpretation was challenged in turn by Peter Temin in Did Monetary Forces Cause the Great Depression (1976) who defended the Keynesian interpretation. Subsequent work, however, continued to emphasize the banking crisis. The 1983 research of Ben Bernanke, who later became chair of the U.S. Federal Reserve, was particularly influential. Bernanke argued that the banking and financial crises had disrupted the ability of the banking system to act as an efficient financial intermediary. Even sound businesses found it hard to borrow when their customary lender had closed its doors and the assets they could offer as collateral to another lender had lost value. The Bernanke thesis not only explained why the contraction was severe, but also why it took so long for the economy to recover: It took time for financial markets to rebuild the relationships that had been sundered in the early 1930s.

Research that took a more global view of the Great Depression, such as Peter Temins 1989 work, reinforced the case for viewing monetary forces as decisive. Barry Eichengreens Golden Fetters (1992), one of the most influential statements of this view, stressed the role of the gold standard in transmitting the Depression and inhibiting recovery. Countries faced with balance of trade deficits because of declining exports should have maintained their stocks of money and aimed for internal price stability. Instead they often adopted contractionary policies aimed at stemming the outflow of gold. Those countries that abandoned the gold standard and undertook expansionary monetary policies recovered more rapidly than those who clung to gold. The examples provided by countries, such as Japan, which avoided trouble because they had never been on gold or quickly abandoned it were particularly telling.

In the twenty-first century economists have turned to formal models, such as dynamic computable general equilibrium models, to address macroeconomic questions, and have used these models to formulate and test ideas about the Great Depression. The 2002 and 2005 work of Harold Cole and Lee Ohanian has received considerable attention in both academic and mainstream circles. It is too early to say, however, whether this work will serve to reinforce traditional interpretations of the Great Depression reached by other methods or produce entirely new interpretations. It is not too soon to predict, however, that the Great Depression will continue to attract the interest of scholars attempting to understand basic macroeconomic processes.

One cannot say for certain that another Great Depression is impossible, but important lessons have been learned and important changes made in the financial system that make a repetition highly unlikely. For example, it seems improbable that any modern central bank would allow a massive collapse of the banking system and deflation to proceed unabated as happened in a number of countries in the early 1930s.

SEE ALSO Aggregate Demand; Banking; Bull and Bear Markets; Business Cycles, Real; Central Banks; Depression, Economic; Economic Crises; Economics, Keynesian; Federal Reserve System, U.S.; Finance; Financial Markets; Fisher, Irving; Friedman, Milton; Gold Standard; Interest Rates; Investment; Keynes, John Maynard; Kindleberger, Charles Poor; Long Waves; Monetarism; Policy, Fiscal; Policy, Monetary; Recession; Stagnation; Unemployment

BIBLIOGRAPHY

Bernanke, Ben S. 1983. Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression. American Economic Review 73 (3): 257276.

Bernanke, Ben S. 1995. The Macroeconomics of the Great Depression: A Comparative Approach. Journal of Money, Credit and Banking 27 (1): 128.

Brown, E. Cary. 1956. Fiscal Policy in the Thirties: A Reappraisal. American Economic Review 46 (5): 857879.

Cole, Harold L., and Lee E. Ohanian. 2002. The U.S. and U.K. Great Depressions through the Lens of Neoclassical Growth Theory. American Economic Review 92 (2): 2832.

Cole, Harold L., Lee E. Ohanian, and Ron Leung. 2005. Deflation and the International Great Depression: A Productivity Puzzle. Minneapolis, MN: Federal Reserve Bank of Minneapolis.

Eichengreen, Barry J. 1992. Golden Fetters: The Gold Standard and the Great Depression, 19191939. New York: Oxford University Press.

Friedman, Milton, and Anna Jacobson Schwartz. 1963. A Monetary History of the United States, 18671960. Princeton, NJ: Princeton University Press.

James, Harold. 1984. The Causes of the German Banking Crisis of 1931. Economic History Review 37 (1): 6887.

Kindleberger, Charles Poor. 1973. The World in Depression, 19291939. Berkeley: University of California Press.

Meltzer, Allan H. 2003. A History of the Federal Reserve. Chicago: University of Chicago Press.

Rappoport, Peter, and Eugene N. White. 1993. Was There a Bubble in the 1929 Stock Market? Journal of Economic History 53 (3): 549574.

Romer, Christina D. 1990. The Great Crash and the Onset of the Great Depression. Quarterly Journal of Economics 105 (3): 597624.

Romer, Christina D. 1993. The Nation in Depression. Journal of Economic Perspectives 7 (2): 1939.

Sicsic, Pierre. 1992. Was the Franc Poincaré Deliberately Undervalued? Explorations in Economic History 29: 6992.

Temin, Peter. 1976. Did Monetary Forces Cause the Great Depression? New York: Norton.

Temin, Peter. 1989. Lessons from the Great Depression. Cambridge, MA: MIT Press.

Temin, Peter. 1993. Transmission of the Great Depression. Journal of Economic Perspectives 7 (2): 87102.

Hugh Rockoff

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"Great Depression." International Encyclopedia of the Social Sciences. 2008. Encyclopedia.com. 28 Sep. 2016 <http://www.encyclopedia.com>.

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Great Depression

GREAT DEPRESSION


The stock market crash on October 29, 1929, sent the United States careening into the longest and darkest economic depression in American history. Between 1929 and 1933, all major economic indexes told the same story. The gross national product (GNP), the total of all goods and services produced each year, fell from $104.4 billion in 1929 to $74.2 billion in 1933, setting back the GNP per capita rate by twenty years. Industrial production declined 51 percent before reviving slightly in 1932. Unemployment statistics revealed the impact of the Depression on Americans. In 1929, the U.S. Labor Department reported that there were nearly 1.5 million persons without jobs in the country. After the crash, the figure soared. At its peak in 1933, unemployment stood at more than 12.6 million without jobs, although some estimates placed unemployment as high as 16 million. By 1933, the annual national combined income had shrunk from $87.8 billion to $40.2 billion. Farmers, perhaps the hardest hit economic group, saw their total combined income drop from $11.9 billion to $5.3 billion.

For the first two years of the Depression, which spread worldwide, President Herbert Hoover (19291933) relied on the voluntary cooperation of business and labor to maintain payrolls and production. When the crisis deepened, he took positive steps to stop the spread of economic collapse. Hoover's most important achievement was the creation of the Reconstruction Finance Corporation (RFC), a loan agency designed to aid large business concerns, including banks, railroads, and insurance companies. The RFC later became an essential agency of the New Deal. In addition, Hoover obtained new funds from Congress to cut down the number of farm foreclosures. The Home Loan Bank Act helped prevent the foreclosure of home mortgages. On the relief issue, the President and Congress fought an ongoing battle that lasted for months. The Democrats wanted the federal government to assume responsibility for direct relief and to spend heavily on public works. Hoover, however, insisted that unemployment relief was a problem for local, not federal, governments. At first, he did little more than appoint two committees to mobilize public and private agencies against distress. Yet after a partisan fight, Hoover signed a relief bill unmatched in American history. The Emergency Relief and Construction Act provided $300 million for local relief loans and $1.5 billion for self-liquidating public works. Tragically, the Depression only worsened. By the time Hoover's term in office expired, the nation's banking system had virtually collapsed and the economic machinery of the nation was grinding to a halt. Hoover left office with the reputation of a do-nothing President. The judgment was rather unfair. He had done much, including establishing many precedents for the New Deal; but it was not enough.

What happened to the economy after the stock market crash of 1929 left most people baffled. The physical structure of business and industry was still intact, undamaged by war or natural disaster, but businesses closed. Men wanted to go to work, but plants stood dark and idle. Prolonged unemployment created a new class of people. The jobless sold apples on street corners. They stood in breadlines and outside soup kitchens. Many lived in "Hoovervilles," shantytowns on the outskirts of large cities. Thousands of unemployed men and boys took to the road in search of work, and the gas station became a meeting place for men "on the bum." In 1932, a crowd of 50 men fought for a barrel of garbage outside the back door of a Chicago restaurant. In northern Alabama, poor families exchanged a dozen eggs, which they sorely needed, for a box of matches. Despite such mass suffering, for the most part there was little violence. The angriest Americans were those in rural areas, where cotton was bringing only five cents a pound and wheat only 35 cents a bushel. In August 1932, Iowa farmers began dumping milk bound for Sioux City. To dramatize their plight, Milo Reno, former president of the Iowa Farmers Union, organized a farm strike on the northern plains and cut off all agricultural products from urban markets until prices rose. During the same summer, 25,000 World War I (19141918) veterans, led by former sergeant Walter W. Waters, staged the Bonus March on Washington, DC, to demand immediate payment of a bonus due to them in 1945. They stood passively on the Capitol steps while Congress voted it down. After a riot with police, Hoover ordered the U.S. Army to clean the veterans out of their shanty-town, for fear they would breed a revolution.

The Great Depression was a crisis of the American mind. Many people believed that the country had reached all its frontiers and faced a future of limited opportunity. The slowdown of marriage and birth rates expressed this pessimism. The Depression smashed the old beliefs of rugged individualism, the sanctity of business, and a limited government. Utopian movements found an eager following. The Townsend Plan, initiated by retired California physician Francis E. Townsend, demanded a monthly pension to people over age 65. Charles E. Coughlin (18911979), a radio priest in Royal Oak, Michigan, advocated the nationalization of banks, utilities, and natural resources. Senator Huey P. Long (18931935), Governor of Louisiana, led a movement that recommended a redistribution of the wealth. All the programs tapped a broad sense of resentment among those who felt they had been left out of President Franklin Roosevelt's (19331945) New Deal. Americans did gradually regain their sense of optimism. The progress of the New Deal revived the old faith that the nation could meet any challenge and control its own destiny. Even many intellectuals who had "debunked" American life in the 1920s began to revise their opinions for the better.

By early 1937, there were signs of recovery in the American economy. Business indexes were upsome near pre-crash levels. The New Deal had eased much of the acute distress, although unemployment remained around 7.5 million. The economy again went into a sharp recession that was almost as bad as 1929. Although conditions improved by mid-1938, the Depression did not truly end until the government launched massive defense spending in preparation for World War II (19391945).

See also: Great Depression (Causes of), Hoovervilles, New Deal, Recession, Reconstruction Finance Corporation, Franklin D. Roosevelt, Stock Market Crash of 1929, Unemployment

FURTHER READING

Phillips, Cabell. From the Crash to the Blitz, 1929 1939. New York: The Macmillan Co., 1969.

Schlesinger, Arthur M., Jr. The Age of Roosevelt. Boston: Houghton Mifflin Co., 1957.

Shannon, David A. The Great Depression. Englewood Cliffs, NJ: Prentice-Hall, 1960.

Terkel, Studs. Hard Times: An Oral History of the Great Depression in America. New York: Pantheon Books Inc., 1970.

Wecter, Dixon. The Age of the Great Depression, 19291941. New York: The Macmillan Company, 1948.

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Great Depression

Great Depression, in U.S. history, the severe economic crisis generally considered to have been precipitated by the U.S. stock-market crash of 1929. Although it shared the basic characteristics of other such crises (see depression), the Great Depression was unprecedented in its length and in the wholesale poverty and tragedy it inflicted on society. Economists have disagreed over its causes, but certain causative factors are generally accepted. The prosperity of the 1920s was unevenly distributed among the various parts of the American economy—farmers and unskilled workers were notably excluded—with the result that the nation's productive capacity was greater than its capacity to consume. In addition, the tariff and war-debt policies of the Republican administrations of the 1920s had cut down the foreign market for American goods. Finally, easy-money policies led to an inordinate expansion of credit and installment buying and fantastic speculation in the stock market.

The American depression produced severe effects abroad, especially in Europe, where many countries had not fully recovered from the aftermath of World War I; in Germany, the economic disaster and resulting social dislocation contributed to the rise of Adolf Hitler. In the United States, at the depth (1932–33) of the depression, there were 16 million unemployed—about one third of the available labor force. The gross national product declined from the 1929 figure of $103,828,000,000 to $55,760,000,000 in 1933, and in two years more than 5,000 banks failed. As a social consequence of the depression, the birthrate fell precipitously, for the first time in American history falling below the replacement rate. The economic, agricultural, and relief policies of the New Deal administration under President Franklin Delano Roosevelt did a great deal to mitigate the effects of the depression and, most importantly, to restore a sense of confidence to the American people. Yet it is generally agreed that complete business recovery was not achieved and unemployment ended until the early 1940s, when as a result of World War II the government began to spend heavily for defense.

See R. R. and H. M. Lynd, Middletown in Transition (1937, repr. 1982); F. L. Allen, Since Yesterday: The 1930s in America (1940); D. Wecter, The Age of the Great Depression (1948, repr. 1956); A. M. Schlesinger, Jr., The Crisis of the Old Order (1957); D. A. Shannon, ed., The Great Depression (1960); C. Bird, The Invisible Scar: The Great Depression, and What It Did to American Life … (1966); A. U. Romasco, The Poverty of Abundance (1965); G. Rees, The Great Slump (1970); S. Terkel, Hard Times: An Oral History of the Great Depression (1970, repr. 2000); C. P. Kindleberger, The World in Depression (1973); G. H. Elder, Jr., Children of the Great Depression (1974, upd. ed. 1998); D. M. Kennedy, Freedom from Fear (1999); T. H. Watkins, The Hungry Years (1999); L. Ahamed, Lords of Finance: The Bankers Who Broke the World (2009); M. Dickstein, Dancing in the Dark: A Cultural History of the Great Depression (2009).

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Great Depression

Great Depression Severe economic depression that afflicted the USA throughout the 1930s. At the close of the 1920s, economic factors such as over-production, unrealistic credit levels, stock market speculation, lack of external markets, and unequal distribution of wealth all contributed to the prolonged economic crisis. The dramatic collapse of the stock market in October 1929 saw US$30,000 million wiped off stock values in the first week. Bank failures became commonplace. At the depth of the Depression (1932–33), unemployment stood at 16 million, almost 33% of the total workforce. The gross national product fell by almost 50%. The Hawley-Smoot Tariff Act increased US tariffs and effectively spread the depression worldwide. Franklin D. Roosevelt, sensing the national emergency, instituted the New Deal, which helped to mitigate the worst effects of the crisis. The economy only really started to pick up with increased defence spending in the 1940s.

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